The very first thing I started subscribing to and reading regularly about the business of aviation was Holly Hegeman’s PlaneBusiness about fifteen years ago. I’m not sure I stumbled upon it, but it was well worth the fee I paid at the time. And oddly enough I think it was through Holly’s website that I stumbled upon Flyertalk.com for the first time. Without that I wouldn’t be writing this blog, or have had the chance to co-found Milepoint.com.
Last month Cranky Flier contributed a piece there that looks at the underlying data in the Government Accountability Office’s review of the proposed American-US Airways merger. It turns out the much of the analysis isn’t very good.
Cranky had to create his own data set. GAO apparently outsourced the data work and won’t make the supporting data for its study available. However, he got close enough to be able to figure out what’s going on.
The GAO study found 1,665 airport pairs would lose an effective competitor, though the vast majority of those would still have other effective competitors. They found 210 markets would gain a competitor.
- 70% of markets losing a competitor would still have 3 or more effective competitors. In some cases, the US Airways-American combination creates stronger competition (since both airlines are weak in the market but would compete more effectively against other airlines if they combined).
- The GAO analysis included over a hundred cities as ‘losing a competitor’ where you don’t even have service from both US Airways and American today.
- The analysis ignores service from alternate airports in the same city, even though they acknowledge standard practice is to look at city pairs and not service between specific airports.
- More than a quarter of the most severely impacted markets are to St. Croix.
Cranky concludes,
Where does that leave us? It leaves us with a grand total of 4 markets that would be truly impacted by the merger. There’s DFW to both Philly and Charlotte, Charlotte to St Thomas, and DFW to Palm Springs.
From a consumer standpoint I really wanted American to remain a standalone airline. I’ve liked the direction they’ve been heading since filing for bankruptcy, building a branch and niche as an upmarket carrier. I don’t expect that positioning to last under US Airways maangement.
But realistically there doesn’t seem like there’s all that much to the competition concerns here, although fewer airlines in the market won’t likely increase competition overall.
Definitely read the whole thing.
And no wonder American and US Airways are pushing for a speedy trial, months ahead of the schedule that the Department of Justice is looking for — they actually think they can win on the merits.
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Wow, I’m actually really disappointed that you and soo many other bloggers do not seem to understand what the DOJ is saying.
First, they are not considering “Direct” service removal of competition, but rather, if, for Example both US and AA have a filed fare for route PHL-DEN, whether or not one, 1 is direct and the other is connection, that is the removal of competition.
The DOJ is not stating that only on routes where both compete with non-stop flights etc., but where both have a fare filed for the route itself and both airlines serve the route, be it direct or connection service.
That said, the DOJ only need point out the internal memos they have stating that consolidation will lead to a 4% market cut and raised fares; that US will slash their “saver style fares” because they will no longer need to offer them. It seems that someone with an economics background should be able to take a step away and see that this will be bad for competition.
This will be bad for customers with further service cuts, etc. How often do you see Airlines only lower fares or give better service when there is no competition. Example: Virgin coming into the LAX-EWR market, all of a sudden UA had to lower fares to reasonable rates.
With 3 majors, you should believe that there will be “unofficial” collusion because it will be very easy for 1 airline to list they will be making a change in the future and they only have to hope that the 2 others go ahead and do it.
Look at the Revenue Loyalty program changes, do you think UA will stick with this program if both US and AA do not match? They are going to get killed next year because the product they offer is not worth the spend they are requiring. With a merged US/AA they are more likely to move to that Revenue program and now they can all give you crappy service for high spend.
In the end this is VERY bad for the consumer and I think that the DOJ can show a history of “hub” closures, airlines going back on their words about hubs, vis-a-vis, Pittsburgh, Cincy, Mephis, etc.
@Steve – the analysis here is about connecting city pairs, not about non-stop service.
In many cases consolidating US Airways and American, although that ‘eliminates a competitor’ in a connecting market, yields a stronger competitor and more competition than before (where both American and US Airways were both small players in a market but combine to be large enough to compete against United or Delta).
There are ~ 200 markets where you get new connecting service (since there are cities American didn’t serve bu US Airways did and vice versa).
But indeed, there will be markets with less competition though nearly all of those will still have significant competition.
I am not a fan of the merger. I don’t think it makes consumers on net better off. I prefer a standalone American.
But there it would be hard to cite a major airline merger ever that had less of an effect on competition than this one. The US Airways and American route networks really are that different.
I’m glad there’s even the smallest of possibilities the merger won’t go through. Let’s face it, the merged FF program is likely to take on the worst characteristics of the two individual programs. A merger’s good for the top execs and stockholders but, for the rest of us, two separate airlines please.
Adding to what Gary is saying, everyone is missing these key points:
1. To the extent competition is dwindled (maybe upward effect on fares), economies of scale/efficiency are likely to be higher (maybe downward effect on fares). How do you adjudicate the net affect of these forces? Very difficult. People should stop making such strong claims.
2. You have you examine this situation against *actual plausible scenarios likely to unfold*, not the status quo or what you hope emerges without a merger. We don’t have a choice between American as it exists now and American + US Airways merged. *American Airlines is in bankruptcy*. How is competition likely to look if they don’t emerge well? Hard to tell. People should stop making such strong claims.
3. The evidence from previous mergers – once you *obviously* adjust for inflation and normalize against oil prices (which shamefully few are doing..) – does not support the argument that consolidation raises fares (“But this time it will be different!”). Diminishing competition does not scale inversely linearly with average prices. There are boatloads of examples in other industries with a few key economies-of-scale players and fierce competition & low prices. The topic of “competition” is very complex, very nuanced. Few seem to appreciate this, yet people are making strong claims.
@surffnutt3000: You must not have been through Jeff Smisek’s re-education camps. “take on the worst characteristics of the two individual programs” is called ENHANCEMENT!
@Steve – When it comes to TSA, DOJ or anything else government-related, Gary modus operandi is always going to be anti-government…why let the facts get in the way of a good blog post.
This is of course all setting aside the philosophical question of when it is or is not appropriate for the government to coercively block decisions made by private individuals (shareholders) using their own money, with little-to-no non-pecuniary negative externalities.
Not saying the the government *shouldn’t* block it; I just think people are far too knee-jerk in their use of the state to do things they don’t like, without seemingly any concern for coercion or respect for a reasonable burden of proof on the side of the government. “I don’t like what these other people are doing, so the government should just stop them” is remarkably unthorough reasoning, IMHO.
Brett Snyder’s (the Cranky Flier) comprehensive analysis of the GAO report is getting a lot of attention this weekend, and justifiably so. Frankly, it makes the GAO look like incompetent buffoons, and makes the DOJ lawsuit appear so frivolous that I wonder if AA/US would have a claim for attorneys fees from the government. If you look at the data, there is just no — repeat, no — evidence that a merger of these 2 carriers will result in materially reduced competition in the industry. Indeed, the evidence actually suggests that the combined carriers will INCREASE competition by being a stronger third or fourth competitor than either airline currently is independently.
Congrats to Brett for doing such thorough work. The blogosphere is increasingly more important than the traditional media.
So am I to assume that fares will go down at an airport served by US, AA, UA, DL and SW because now only AA, UA, DL, SW serve them? If each airline had 80% full flights to an airport, wouldn’t it be in AAs best interest to cut service to that airport to bring each carrier up to 90%, better for the industry and better for higher airfares.
No one has mentioned the fact that DOJ was able to stop ATT/TMobile from merging on the believe that going down from 4 major carriers + regional carriers to 3 major carriers + regionals because it was anti-competitive.
Right now the amount of air traffic out there makes these 4 carriers compete, if we drop down to 3 carriers, they cut capacity, which they will; exactly why will they have to compete? If they are filling planes at 80+% now and they can cut capacity even further, people have even less choice of carriers.
How much longer can we hope Virgin sticks around the way it is losing money; that removes another regional carrier.
Further, can anyone really give one good outcome from the UA/CO merger? They have cut routes to numerous cities in Europe, thrown a HUGE fit about competition at Houston, Auckland didn’t happen, Cairo (understandably so but still) didn’t happen, SFO-TPE gone, Customer service levels are awful, and both DL/UA have gutted their loyalty programs.
Seriously, who sees the point of a loyalty program when there is 3 carriers? If I were these carriers I’d cut the programs, period, there are 3 of us, you don’t have that many choices, once their planes are full you’ll have to fly ours and we don’t have to give you anything to fly, because you don’t have a choice.
No one has mentioned the “Hub” issues, each one of these carriers that has merged has gutted at least 1 “hub”, not to mention the memos that US Airways submitted to the DOJ stating that a merger would cause further consolidation and raise airfares, and that they will be eliminating these lower “saver type” fares because they don’t need to use them to compete, all that was in the LA Times article.
Just because UA got bigger does not mean they are stronger and able to offer lower fares, in UAs case they actually have more people working a Gate than they did prior to the merger, UA need 1 person domestically and 2 Internationally, new UA needs 2 domestically and 4 internationally.
End of the day, this is bad for the consumer.
Lots of BS being thrown around here, to be completely frank.
Leaving the legal merits of the case aside entirely (the legal arguments are only tangentially relevant to the real-world implications of the merger, and not that interesting as a result), any analysis of the merger based on the concept of “overlapping routes,” shared airport pairs, is pure charlatanism. As a air travel consumer, the costs you should be concerned with are not those of your plane tickets (which have generally been going down), but those caused by (i) centralization and (ii) over-optimization. Both increase fragility in airline networks, and the costs of fragility (delays and cancellations) are both opaque to and, at the same time, borne by the consumer.
More flights through fewer hubs means local stressors (weather, mechanical, etc) have global effects as delays ripple through the over-optimized (read: all-time high load factors) network. It’s all about convexity, and the length/likeliness of delays are both convex to the level of optimization in the network (which will only rise with consolidation; mergers don’t “make sense” on paper otherwise).
If you are one who thinks optimization is a good thing for dynamic systems like airline networks, then perhaps you would rather have one lung, one kidney, one eye, one ear, etc; after all, the two you have are wildly inefficient.
@mark – why offer facts at all in your comments that disagree with my blog posts? 😉 My point here is to highlight Brett’s analysis which seems pretty good. What about his take on the data do you disagree with?
@Ben Hughes
Last time I checked both the Sherman Act and the Clayton Act have been held as a constitutional use of federal govt power.
Judge Kollar-Kotelly will eventually issue a ruling based upon the evidence given at trial. From what I understand from my colleagues in our corp council’s office, she is very thorough and very good. The legal standard is greater weight of evidence, so the US/AA team is going to have to present better evidence that the merger will not reduce competitiveness and at the very least be neutral to the customer across domestic industry as a whole.
This is where Parker and his minions big mouths hurt the case, they pretty much admitted that this merger is great because it will allow them to cut capacity, raise prices, and provide less service. It’s a pretty big hole to dig out of. The US/AA team has to provide evidence that the merger will not do those things. Pretty hard to swallow that one at face value.
I would be pretty surprised if Judge Kollar-Kotelly agrees to the Nov trial date. It could happen, but getting a quick trial that could last a week on the DC circuit is pretty hard.
The merger would make customers in the main worse off faster.
It seems like the industry is rallying its supporters. Hopefully the industry’s din falls on deaf ears.
Great article, but he’s delusional in thinking that assesing the effect of a merger on consumer surplus is not the deciding factor. Regulators are concerned about consumer welfare not total welfare.
@Steve
Would you mind posting a list of the “numerous cities in Europe” that have lost United service? Moscow and Copenhagen are the two I can think of. However, there have been plenty of new flights to Europe since the merger. Not to mention the addition of SFO-TPE, DEN-NRT, EWR-IST, and many more domestic flights. And by the way, airlines don’t cut service to stick it to the consumer, they cut it because the plane can be better utilized.
I’m sorry, but arguing that less competitors is better is against the fundamental components of the free market and capitalism. When people read these blogs they need to remember that while bloggers say they are objective, they are far from it as they are being compensated.
Gary is most likely being compensated by either AA or US, and this is part of a strategy to rally supporters against the DOJ lawsuit.
The crux of the matter is that the United/Continental merger should have been blocked. Now American needs a merger to compete as an equal with Delta/Northwest and United/Continental. Competition among equals is more likely to help competition in the long run. Also moving Continental into the Star Alliance unbalanced the competition between the alliances. Moving US Air out of Star Alliance will help restore some balance there as well.
I completely understand why the typical frequent flyer (aka “a person likely to read this blog”) would be leery of another airline merger. Choice is good, right? Well, yes and no. Do you really want to be flying a bankrupt or near bankrupt airline, or would prefer to fly one that is relatively stable and relatively profitable? These are “great” times in the airline industry and the profit margins are only 2%. As anyone in business knows, that’s a horrific profit margin. Do you want it to be less than that? Before all the airlines started merging, the industry losses were staggering. So, sure, you could make the argument that — in the short run — consumers were better off when NW, CO and AirTran were independent competitors, but everyone knows that there are consequences for being consistently unprofitable. Those consequences usually involve going out of business. And we all know there are lots of long gone airlines. American itself is in bankruptcy. So I think folks need to be a bit realistic about what’s long-term possible in the industry. The idea that you have a monopoly in the airline business when profits are only 2% seems more than a bit crazy, no? And now that there are already 3 really big USA airlines (United, Delta and Southwest) it seems pretty bizarre to argue that American and US Airways should be consigned to second-tier status. If you owned or managed one of those airlines, do you think you’d find it fair that all your competitors got to combine but you were required to stay small? Does that make any sense at all?
I have to agree with Ben Hughes in this case. I thought these trials would bring two famous IO economists with their analyses and show their evidence, and the judge rules. The welfare analysis of M&A is way harder than the simple exploration that this guy provides. I haven’t seen the Gov’t analysis but Cranky guy’s analysis doesn’t make a lot of sense. His analysis only looks at the number of competitors and the CURRENT market share. Of course, the number of competitors matters but that is not the final goal. What really matters in the end is the price that consumers are paying and the routes they can fly (thus consumer welfare). Did he say anything about the price after merger? Also he assumes the market share won’t change after merger but market share can change and is a key factor for price. One example: UA has 60% share of ORD-HNL before US-AA merger. If US-AA decreases the flights in this route after merger, of course the market share changes: UA’s share is likely to increase. Now doesn’t that change the price on this route? Also, how about the fact that US usually offers much cheaper tickets on the routes they don’t fly often or have a smaller market share? After merging, they won’t do that anymore because with AA, they don’t have to (a simple game theory). So that means the lowest price would go away. Anyway, I can give many more examples why Cranky guy CAN BE wrong if he draws his conclusion from his current analysis. But what I am worried about is that the attention that he is getting and the fact that many people simply think that his argument is correct…
@Kris – your example already fails unfortunately. EWR-IST was just cut, and there’s no real indication SFO-TPE is actually going to happen, especially since BR just joined Star and flies the route.
UA is using its 787s to diminish capacity on existing routes for the most part, not introduce new routes.
Also, IAH-CDG was cut…EWR-ATH was axed…IAD-MAD (the EI partnership) ended…
So let me get this straight….Cranky flier and Gary argue that when 4 airlines are selling tickets in a given market where US and AA a weak, that after a merger, there would be MORE competition with only 3 entities selling tickets?
Bwahaha. That is so ridiculous that it isn’t even funny. The weakest players have to offer the lowest fares, forcing the strongest players to moderate their fares. When you have 3 players left, the very weakest player’s fares will have been eliminated, capacity will be reduced, and the strongest player’s fares will go up.
The only thing more competitive is the weakest player, but for consumers, this is simply getting the shaft.
And before one assumes that the government is comprised only of idiots, I tend to believe that the DOJ and whoever did their analysis s probably more qualified than a single hobbyist. Until I see overwhelming evidence that cranky flier is more qualified than professionals in this, I am skeptical about his findings.
In other news, I just backed into how to make a cancer fighting drug. I was able to do so in just a day. but I did stay in a Holiday Inn last night…
Hard for US & AA to defend when they themselves said the merger was to decrease competition and increase fares.
Just like AT&T/TMobile, this is a slam dunk and impossible to defend. There will be no trial. Oligopolies are as evil as monopolies.
Speaking of TMo- They’ve had to evolve into a much better company since their plan to merge with the competition was scuttled. Listening Doug Parker?
In reading these comments, t is remarkable to me how little most people — even frequent flyers — seem to know about the airline business. First, AAExPlat says “the weakest players have to offer the lowest fares, forcing the strongest players to moderate their fares.” That is certainly not true in the context of AA and US. Think about it: in markets where US has a tiny market share and AA has a large share (basically, markets out of AA’s hubs where US offers a small amount of connecting service) why would US generally want to lowball AA’s prices? US could, for example, sell each of its connecting seats individually to 2 different travelers for more money than selling the one ticket for the connecting pax (remember, people will pay much more for a nonstop seat than a connecting seat). Also, if US started to lowball AA’s hub markets, AA would retaliate and start lowballing US’s markets — a strong disincentive to not really “compete.”
It’s is also dead wrong to say that Parker has admitted that this merger would reduce competition. Far from it. Parker has correctly stated that industry mergers in the past decade have, overall, raised average fares in the industry. Thank God, or all the major airlines would (again) be in Chapter 11 since they were all losing money. The spiraling price of jet fuel would have made it even worse. He has not said that THIS merger would raise ticket prices. Just looking at a map strongly indicates that AA and US are not major competitors. When was the last time you flew one of these airlines over the other because the fare was lower? My guess is that, for almost all travelers, the answer is “never.”
I think the problem is that overall it’s easier for a few companies to raise prices: an oligopoly.
In related news Delta was named the most despised company in America:
http://247wallst.com/special-report/2013/08/23/the-ten-least-respected-companies-in-america/3/
IAHPHX. Do you work for US? What is your role in the industry?
To comment on your post…so in the first part of your post, you say I am wrong and there is effectively no competition already because carriers fear retaliation? If so (I contend you are wrong about that btw…look at what VX and SW entering EWR and has done), how would it make things more competitive to have three airlines not competing vs 4?
You are inaccurate about the second part of your post entirely. If you read through the DOJ evidence and particularly the emails and notes among US management, here’s what has actually been said pertaining THIS merger (quote from the LA Times):
One of the major points raised in the Justice Department complaint is that US Airways had competed with American and other carriers on certain routes by offering discounted fares.
Under its Advantage Fares program, it offered cheaper fares but on routes that included at least one stop. Other carriers offered nonstop fares for those routes, but for much higher prices.
According to an October 2012 internal analysis cited in the complaint:
“The Advantage Fares “program would have to be eliminated in a merger with American, as American’s large non-stop markets would now be susceptible to reactionary pricing from Delta and United,” the analysis said.”
AND (from a different publication citing the DOJ suit)
“The complaint characterizes US Airways executives’ “fear” of American’s standalone growth plan as “industry destabilizing” and that the airline worried that American’s growth plans would increase competitiveness within the industry….
But competition isn’t just about prices…It is also about services provided. This nugget pertains to that portion of the discussion:
“In a 2011 email exchange, one senior executive groused about the need to install in-flight wireless Internet.
He wrote: “[N]ext it will be more legroom. Then industry standard labor contracts. Then better wines. Then the ability to book on Facebook. Penultimately, television commercials…”
US Airways Chief Executive Doug Parker wrote back: “Easy now. Consolidation will help stop much of the stupid stuff but inflight internet is not one of them.””
This is what has been said. Some of it directly about this merger, some of it directly about AA, and some of it in general.
If you maintain that this merger is about increasing competitiveness, you are kidding yourself.
I’m with GU.
There’s a lot of sheeple out there. Don’t be one of them.
AAExPlat —
The DOJ’s assertion that US is some sort of discounter in the airline industry flies in the face of everything WE ALL KNOW about that carrier. Find me a US customer — a single one — who flies that airline because of its low fares. Now sometimes they match low fares, and perhaps the DOJ has found an odd circumstance where US is offering a lower fare on a connecting flight compared to another airline’s last minute nonstop fare (nobody in the industry has ever heard of these “Advantage fares”).
And it certainly is possible that 3 airlines can be more competitive than 4 in certain markets. It’s very, very difficult to make money in the airline industry if you fly a weak schedule: high yield business customers almost always choose convenience over price. If, alone, the two weakest competitors only offer 2 flights a day but, combined, they can offer 4 (due to flights to different hubs) they have a much better chance of being competitive in that market.
As far as retaliation goes, it’s much more of a concern for higher cost hub-and-spoke carriers than the low cost airlines. Presumably, a low cost airline enters a market knowing that its costs are low enough to compete against a higher cost hub-and-spoke airline, even at their fortress hub. That’s basically Spirit’s entire expansion strategy these days. In contrast, US Airways’ unit costs (like other legacy carriers) are too high to make money in hyper-competitive markets, so they are far less likely to engage in actions likely to trigger retaliatory fares.
As far as my own role in the industry, I’m an investor, analyst and frequent flyer. I am likely to make a buck from my investments if this deals goes through, but not because US is going to raise fares. They are simply going to manage AA’s strategic assets much more effectively. At the same time, though, I will be worse off as a frequent flyer because consolidation definitely reduces the ability to find loopholes in the frequent flyer programs (hampering one’s ability to get “more than you deserve”). Like we’ll all have to pay more for business class award tickets to Asia. I don’t think that’s a legitimate reason for the government to stop the merger, though. 🙂
iahphx.
First off, I don’t agree with your statement that US isn’t a lower yielding airline. For the first six months of 2013, AA mainline yield was $15.09 and US yield was $14.76. Not a huge difference, but a lower number either way.
So while you may not see US as a discounter in your travels, in general, they don’t quite attract the same yields as AA (or UA or DL for that matter). Given those numbers, I feel fairly certain that there is at least one customer out there that chose US based on fare.
Also, US has the lowest unit cost among the legacies because they pay their employees very little relative to their peers. If the lower yielding network will be combined with wage raises to bring pmUS employees up to AA standards (the new higher ones I might add), it would immediately render a larger part of US’s network unprofitable. Unless of course the fares can be raised and more revenue generated.
But let’s just assume I agreed with you for argument’s sake…I still contend that having less competition (no matter how small or large) is bad for consumers. Otherwise, why should there ever be more than two players in any market?
To rebuke your “US doesn’t discount” argument and the “bigger airlines are able to improve competition” argument all in one go, take a look at the fare sales US has been running (and is running as I type) between DFW-PHL…$148 rt/ai. Once the merger is through, do you think that fare would still exist? Nope. They would cut capacity, eliminate the discount fares and consumers would get the shaft.
As far as you being an investor, I imagine that has to be a factor in your viewpoint. And of course the reason you would make a buck in case the merger goes through is because Wall Street perceives there to be a positive revenue effect from the merger. If Wall Street thought the merger would crater revenue and profitability you’d probably lose money on the investment.
This merger (like all the other ones before it) are all about raising prices and decimating competition with the goal to:
– guarantee union employees higher pay rates (union goal)
– transfer more value to shareholders (shareholder goal)
That’s it…that simple. And the money for both goals will come from the flying public. You can try to confuse me with all sorts of minutiae, but the basic economics simply won’t change no matter how badly you want them to.
The DFW-PHL fare you cite is a match of a Spirit fare in that market. US is trying to drive Spirit from PHL. Without Spirit, there’d be no $148 fare. US is not a discount airline and would never dream up such a fare on their own.
American does the exact same thing in their hubs. I flew from PHL to MIA earlier this year for $59 because they didn’t like the discounting going at from PHL to FORT LAUDERDALE (a little too close to home, I guess). I’m actually surprised that, so far, I haven’t seen them match the Spirit fare to DFW.
I’m not a conspiracy theorist, but after seeing how DOJ pretty much surprised everyone and has apparently cobbled together some of the data, I started to wonder what else could be going on, like what entities would benefit from a hindered AA/US merger (Delta, United,…)? Where are the HQ for these entities (Atlanta, Chicago…)? What is the home base of some of our top gov’t current and former employees (Chicago…)? Does anyone out there really think there isn’t any behind the scenes lobbying going on?
iahphx.
So what you are saying is that when a smaller, less established competitor tries to compete on price, the bigger guys have to follow…which argues against your “fewer competitors are more competitive for the consumer” stance…
@UA-NYC
Sure, the route will be cut, but they gave it a shot, let it run for over a year before it was determined to be not financially feasible.
So long as SFO-TPE is in the timetable and available for booking, there is a concrete indication that it will start.
IAH-CDG was basically replaced by SFO-CDG.
I would hardly call the ending of the EI partnership as an example of United ending service on IAD-MAD.
So they cut four flights to Europe, but they added more, not to mention that four flights out of nearly 50 routes and many more flights is far from “numerous.”